These 4 Measures Indicate That Arctic Paper (WSE:ATC) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Arctic Paper S.A. (WSE:ATC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

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How Much Debt Does Arctic Paper Carry?

As you can see below, Arctic Paper had zł215.7m of debt at June 2022, down from zł369.0m a year prior. However, it does have zł254.6m in cash offsetting this, leading to net cash of zł38.9m.

How Strong Is Arctic Paper's Balance Sheet?

The latest balance sheet data shows that Arctic Paper had liabilities of zł792.8m due within a year, and liabilities of zł479.3m falling due after that. Offsetting these obligations, it had cash of zł254.6m as well as receivables valued at zł659.6m due within 12 months. So it has liabilities totalling zł357.9m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Arctic Paper has a market capitalization of zł1.32b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Arctic Paper boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Arctic Paper grew its EBIT by 305% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Arctic Paper will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Arctic Paper has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Arctic Paper recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although Arctic Paper's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of zł38.9m. And we liked the look of last year's 305% year-on-year EBIT growth. So is Arctic Paper's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Arctic Paper that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.